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The rating upgrade has been facilitated by a number of developments of
which the most important are the following -- receipt of annual accounting
information for 2003 (given that Transelectrica S.A's existing
corporate identity was not formed until 2000 there has been historically
little accounting information available); Transelectrica's
continuing strategic importance to the national economy as well as fore-filling
a key role in meeting EU accession requirements; and the expectation
that regulatory developments will be broadly positive and in connection
with this the signing of a concession agreement with the government regarding
private patrimony.

Transelectrica remains 100% owned by the State and Moody's
believes that the existing Romanian government, which has oversight
of the company via the Ministry of Economy and Commerce and guarantees
a very high proportion of the existing long term bank debt, will
continue to act as a supportive shareholder which will seek to avoid potential
financial stress arising at Transelectrica. The Ministry has provided
a letter of support which recognises Transelectrica's strategic
importance. Additionally Moody's believes that Transelectrica's
regulatory position has been improved via the recent signing of a concession
agreement with the government under which the company will own substations,
systems and equipment, while the State will retain ownership of
the electric lines. Not only does this clarify the issue of private
patrimony (around 50% of the company's fixed asset base consists
of assets owned by the State which are administered by Transelectrica),
but as a result of the agreement, Transelectrica will be able to
start depreciating electric lines from 2005 onwards. Moody's
expects that such costs will now be covered in the regulators calculation
of Transelectrica's regulated asset base from 2005, thereby
improving Transelectrica's regulated revenue base.

Moody's believes that there is no reason why the Romanian Government,
even if they had financial difficulties themselves, would stop Transelectrica
meeting its debt obligations if it had the financial resources to do so.

Moody's regard the present regulatory cost plus mechanism as relatively
benign, but expect that during 2005 a revenue-cap tariff
setting method will be adopted. If this development does occur,
as Moody's thinks likely, then a rate of return will have
to be agreed by the regulator in which Moody's expects the recovery
of all depreciation charges will be factored i.e.,
electric lines will be factored for the first time. Moody's
expect that if the regulatory environment does change in the near future,
such an environment will remain broadly benign for Transelectrica.

There remains an outstanding issue concerning circa Euro 6.6 million
of unpaid dividends owing to the government -- the company are still
negotiating as to when they will pay. Given the supportive nature
of the government as the sole shareholder, Moody's whilst
concerned by the potential impact to Transelectrica's liquidity,
believe that it is highly unlikely that the government will seek immediate
payment, but will most likely require these monies to be paid over
a protracted period. Furthermore Moody's believe it likely
that the current requirement to pay the government a dividend equal to
50% of Transelectrica's annual net profit will be eased in
the future.

The expectation that future dividend payments will be at a lower proportionate
rate is based on Transelectrica's business plan (as approved by
the government), which calls for a significant increase in capex
during the next 10 years. The major part of Transelectrica's
asset base was constructed in the 1960's & 1970's,
and has already exceeded its originally intended operational life.
Relatively low utilisation of capacity as well as high expenditure on
maintenance has kept this mature network operational, but major
investment is required and Moody's expects to see capex levels exceed
Euro 100 million p.a. over the next four years peaking at
close to Euro 150 million in 2005.

Such large capex requirements are a concern, and although Moody's
believe that the current and expected future regulatory environment as
well as an average anticipated increase in electricity demand of close
to 3% p.a. over the next 10 years will support year
on year improvements in operational cash flow, debt levels are expected
to rise from the Euro 85 million in 2003 to circa Euro 150 million in
2004 and continue to rise over the next few years. However,
given the very high proportion of regulated revenue and a relatively supportive
regulatory environment Moody's considers that Transelectrica will
be able to maintain an adjusted retained cash flow to adjusted net debt
ratio consistently above 20% and interest cover of at least 4 times
during the next four years. Therefore in the absence of any liquidity
issue arising Moody's is not expecting any negative pressure to
evolve from the enhanced capex program.

Furthermore Moody's notes that the higher capex supports a key strategic
aim of Transelectrica, in positioning the company to support a role
as a major facilitator of the transmission of electricity on a European
regional basis, whilst also helping to comply with EU electricity
policy requirements.

Transelectrica S.A., which is headquartered in Bucharest,
runs 8,950 km of over head lines and operates 77 substations,
1 national and 5 regional dispatch centres (covering 342 power units).
The company accounts for transmission volume of around 67% of the
electricity generated in Romania.

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